Watch for avalanche of sell orders Monday

Monday’s trading will be the first opportunity stock investors in the U.S. will have to act on a major technical violation that occurred at Friday’s close: The breaking of the 200-day moving average.

This could result in an avalanche of sell signals hitting the market at Monday’s open, since many technical analysts use the 200-day moving average as the dividing line between bull and bear markets. They consider the primary trend to be up so long as the market is trading above its 200-day moving average, and that this trend turns to bearish whenever the market closes below this average—and that is what happened at Friday’s close.

Though the market doesn’t always fall off a cliff upon breaking the 200-day moving average, that certainly is what happened the last time the market broke this key technical level.

That occurred last Aug. 2, on which day the S&P 500 closed at 1,251.46. At its intra-day low just one week later, on Aug. 9, the S&P stood 150 points lower at 1101.54—an extraordinary decline of 12% in just five trading sessions.

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